How Many Types of KPIs are There?

It seems the Holy Grail for scorecards and dashboards seems to be organizations seeking to answer, “What should our key performance indicators (KPIs) be?” Websites such as KPI Library.com help address this challenge. At the heart of selecting KPIs should be their linkage to the executive team’s strategy. However, there are different stakeholders in an organization, such as internal manager and investor governance boards. Each stakeholder has different needs. Hence there should be different types of KPIs.

Performance measures reported in scorecards and dashboards is one of the components in the portfolio of integrated performance management rivaling in importance other methodologies such as customer relationship management and managerial accounting. Regardless of the type of KPI, analytics (such as segmentation, predictive modeling, forecasting, design of experiments and mathematical optimization) are ideally imbedded in each methodology, and they are critical for employees to achieve and exceed KPI targets.

Author Brett Knowles, founder of the consulting firm PM2 and a veteran of the balanced scorecard thought leader community, has given much thought to the topic of different KPIs for different purposes. In Volume 4, Number 6 of his firm’s Performance Measurement &Management newsletter Brett describes different types of KPIs in an article titled “Five Distinct Views of Scorecards – and Their Implications.” With Mr. Knowles permission, here they are abbreviated with my minor edits:

Valuation – There is a need to describe what the organization does in a way that the financial world can understand: monetary currency (e.g., dollars, Euros). All activities need to be financially valued, including tangible assets (e.g., buildings and inventories) and intangible assets (e.g., brand equity and customer loyalty). Several methodologies exist that grapple with this need, including EVA, ABC, etc.

The challenge is that more than 80% of value is created by intangible assets, yet traditional accounting systems do not do a good job of capturing intangibles. The scorecard has proven to be a great tool for making the intangible assets visible and valuable.

Information in this area needs to be:

Centered on outputs, outcomes or deliverables,

Closely related to existing valuation mechanisms,

Standard, repeatable and reliable.

Navigation – Internal managers need to make informed decisions on a frequent basis that are consistent with medium- and long-term strategy. Strategy, cascaded downward into the organization through a strategic scorecard and operational dashboards, is going to dictate both what should be done and how important it is. This creates alignment of employees’ actions and priorities across all functional and regional boundaries and consistency across time. This where performance management methodologies and analytics play a critical role.

Information in this area needs to be:

Very responsive to shifts in the work activities,

Process based,

Related to overall effectiveness and efficiency.

Compensation – Scorecard frameworks lend themselves to rewarding employees for contributing to the success of the organization. Over-performers should be distinguished from under-performers. Compensation views differ from the previous two in that only a small portion of employees’ activities are closely related to the valuation of the organization and often the in-process information used for navigation is not results-oriented enough for effective compensation models.

Information in this area needs to be:

Related to the value that the team can control and create,

Output and outcome related,

Accurately measurable and repeatable across locations and time.

Benchmarking – The only way to determine whether your organization is making progress is to compare it to other “things” (“comparatives”). There are many comparatives available: competitors, best-in-class, world-class. In the true sense, even target, forecast and revised-forecast are all comparatives too.

The challenge with benchmarks is that the data is sparse and with “dirty” quality. Also, there can be apples-and-oranges inconsistencies (e.g., including or excluding data, measuring different start-and-end times of processes). Comparatives do not, typically, go into enough detail to provide operational insights into diagnosing any identified issues, nor do they cover the full breadth of your strategy.

Information in this area needs to be:

Available from other sources,

Understandable and relatively comparable,

Strategically related to your organization.

Evaluation – Periodically, there is the need to get an accurate measurement of how the organization is performing. Periodically the organization needs to undertake such activities as customer surveys, employee surveys, supplier assessments, etc.

These activities are too expensive and time consuming to be conducted often enough to be useful for navigation, but can be used to underpin selection and validation of navigation indicators, support compensation models and be used in reporting performance to outside stakeholders.

Information in this area needs to be:

Survey based,

Comprehensive and rigorous,

Closely related to overall deliverables.

Brett summarizes by stating that most organizations need to consider their organization’s performance in two or more of these views. For example, a shared service IT department may need to prove and measure its contribution to the organization’s overall valuation, provide monthly navigational information for the project managers (and service level agreements [SLAs] for their customers), and develop a compensation package for use around the globe. They may also need to compare themselves to industry benchmarks and function points.

Brett adds that it is important to note that in many organizations it is possible to merge these various views into fewer and eventually just one. It is difficult, though, to begin with just one, as the numerous stakeholders need to first develop some confidence that the scorecard model adequately describes their view of the organization. Consider building the various views as a trick to speed implementation of your pilot scorecard. A simple way to do this is to keep the one strategy map, but link different indicators to it for each of the views.

My feeling is Brett is on to something important. As I have mentioned numerous times there is confusion and lack of consensus as to what a balanced scorecard is and associated ambiguity. Further many organizations neglect to first construct a strategy map from which to derive its KPIs. Understanding that there are multiple views can bring clarification.

ABOUT THE WRITER

Gary Cokins is an internationally recognized expert, speaker, and author in advanced cost management and performance management systems. He is a Manager of worldwide performance management solutions, with SAS, a leading provider of business analytics software headquartered in Cary, North Carolina. Gary received a BS degree in Industrial Engineering / Operations Research from Cornell University in 1971and an MBA from Northwestern University's Kellogg School of Management in 1974.

Gary began his career as a financial controller and operations manager for FMC Corporation and he has been a management consultant with Deloitte, KPMG Peat Marwick, and Electronic Data Systems (EDS). Gary’s third book, Activity Based Cost Management: An Executive’s Guide has ranked #1 in its topic on Amazon.com. His two most recent books are Performance Management: Finding the Missing Pieces to Close the Intelligence Gap (ISBN 0-471-57690-5) and Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics (ISBN 978-0-470-44998-1)